Latest Stories

Know when to hold ’em (and when to report ’em)

A district court holds that online gambling and payment accounts
managed by foreign companies are subject to FBAR reporting.

The U.S. District Court for the Northern District of California held
that a taxpayer’s online poker and payment accounts with companies
located overseas were subject to reporting on FinCEN Form 114,
Report of Foreign Bank and Financial Accounts (FBAR).

Facts: John Hom, a U.S. person, gambled online
through internet accounts with PokerStars and PartyPoker. He used his
account at FirePay, an online financial organization, to fund his
online poker accounts in 2006. Sometime in 2006 and 2007 the aggregate
balance in the online accounts exceeded $10,000.

Hom did not file FBARs for 2006 and 2007 until June 2010. In
addition, he excluded his FirePay account from his 2006 FBAR. The IRS
detected discrepancies in his tax returns for 2006 and 2007. As a
result, it opened an FBAR examination and assessed a $30,000 penalty
for 2006 ($10,000 for each of the three accounts) and a $10,000
penalty for 2007 based solely on his PokerStars account.

Issues: A U.S. person is required to file an FBAR on
or before June 30 for the preceding calendar year if (1) the person
had a financial interest in or signature authority over a bank,
securities, or other financial account located outside the United
States; and (2) the aggregate value of all foreign financial accounts
exceeded $10,000 at any time during the year. For a nonwillful
violation, a civil penalty of up to $10,000 can be imposed, unless the
violation was due to reasonable cause and the amount of the
transaction or the balance in the account at the time of the
transaction was properly reported (31 C.F.R. §103.24; 31 C.F.R.
§1010.350; 31 C.F.R. §103.27(c); 31 U.S.C. §5321; and 31 U.S.C. §5321(a)(5)(B)).

Hom argued pro se before the district court that those
accounts were not “bank or other financial accounts” for purposes of
the FBAR rules. Hom also argued that “located in” refers to the
geographical location of the funds and presented evidence that
PokerStars had bank accounts in the United States in which his funds
might have been held.

Holding: The court held that Hom’s accounts were
foreign accounts subject to FBAR reporting. The court agreed with the
IRS that the three companies functioned as banks and thus concluded
that his accounts were reportable bank accounts. It cited
Clines, 958 F.2d 578 (4th Cir. 1992), in which the Fourth
Circuit found that by holding funds for third parties and disbursing
them at their direction, an organization functioned as a bank.

Regarding the funds’ location, the court said it was irrelevant where
the websites opened their bank accounts. FirePay was located in and
regulated by the United Kingdom; PokerStars and its parent company
were licensed and regulated by the government of the Isle of Man; and
PartyPoker and its parent company were licensed, regulated, and based
in Gibraltar. Those were the locations of Hom’s digital accounts, the
court held. Accordingly, it granted the government’s motion for
summary judgment.

When professionals prepare written material for readers inside their organization or outside, they should make sure that no errors distract from the message they need to convey. Take this short quiz for practice in subject-verb agreement.